Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.70 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 491,740 sprinkler units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable and $2,050,140 fixed. Selling and administrative costs are $2,651,657 variable and $794,950 fixed. If the average sales price per sprinkler unit did not increase when the company began mass-producing the special-order sprinkler, what would be the effect on the company? (Round answers to 0 decimal places, e. g. 5% or 2,520.25.)

Contribution margin ratio Decrease-Increase by %
Profit Increase-Decrease by $

Contribution margin is increased by 2.31%

Profit in increased by 12.1%

Explanation:

Current Figures:

Selling Price = $26.50 per unit

Variable cost per unit = ( $6,863,512 +  $2,651,657 ) / 491,740 = $19.35

Contribution Margin per unit = Price - variable cost = $26.50 - $19.35 = $7.15

Total Contribution margin = 491,740 x 7.15 = $3,515,941

Fixed cost = $2,050,140 + $794,950 = $2,845,090

Break-even point = Fixed cost / contribution margin per unit

Break-even point = $2,845,090 / $7.15 = 397,915

Profit = $3,515,941 - $2,845,090 = $670,851

Expected Changes:

Price = Increase by $0.2

Variable cost  = Increase by $0.70

Sale volume = Increase by 10%

Revises sales volume = 491,740 x 110% = 540,914 units

Revised price = $26.50 per unit + $0.2 per unit = $26.70

Revised Variable cost = $19.35 + $0.70 = $20.05

Revised Contribution Margin = Revised Price -  Revised Variable cost = $26.70 - 20.05 = $6.65

Total Contribution margin = 540,914 x $6.65 = $3,597,078

Break-even point = Fixed cost / Revised Contribution Margin = $2,845,090 /  $6.65 = 427,833 units

Revised Profit = Contribution Margin -  Fixed cost = $3,597,078 - $2,845,090 = $751,988

% Change

Contribution Margin = ( $3,597,078 - $3,515,941 ) / $3,515,941 = 2.31% increase

Profit = ( $751,988 - $670,851 ) / $670,851 = 12.10% increase

answer; capital structure decision;

answerattainable;